The E.P.A. is Rolling Back Fuel Standards for Cars. That’s Good for the Auto Industry. Isn’t It?

Performance improvement expert Mike Rayne of FTI Consulting’s automotive practice looks at the question that has the auto industry and parts suppliers scratching their heads about the future.

In April, the Environmental Protection Agency (E.P.A.) announced that it intended to revoke fuel economy standards set in 2012 under the Obama administration. Those rules, known as CAFE standards, specified that all new passenger cars and light trucks made in the U.S. must get 54.5 miles per gallon by 2025.

Much is still unknown about the effects the proposed rollback will have. In the short term, the auto industry will benefit simply because the change will ease certain pressures on domestic carmakers. Though the auto industry had been hitting benchmarks towards the 2025 goal, the carmakers insisted the target was too high. Indeed, the Alliance of Automobile Manufacturers cheered the E.P.A.’s announcement.

But longer term, the rollback may have a significant impact on the companies that supply parts to the automakers — as well as the health of millions of people.

The Road Gets Bumpier

Whatever the new CAFE standards, not much will change for carmakers this year and next. Production on the 2019 model year, already underway, will continue. However, as we move into 2020 and beyond, the implications and “cause and effect” of the rollback increases and becomes far reaching — especially so for Tier 1 parts suppliers and their sub-suppliers ("Tier 2").

The going could be rough for both. That’s because Tier 1s have been investing in technology to meet the 2025 standards for years, underpinned with capital and resource commitments that have already been put in place. Shifting gears quickly affects the business case for these new technologies and the timelines of product design, development and field testing of the technologies. It also impacts the industry’s appetite for capital investment in future technologies.

The Bigger Picture

For more than a decade the US automotive industry has had clear direction on fuel economy and emission standards. This has promoted the introduction of groundbreaking technologies that benefit drivers and the environment while more closely aligning the US auto industry with Europe and Asia providing commercial and environment benefits.

Two mitigating circumstances may come in to play with the E.P.A. rollback, however:

The stance of California in the current debate. Officials in the Golden State have pledged to vigorously defend the current fuel economy standards and CO2 regulations.

Automakers in Europe and Asia are already out ahead with improved fuel economy and emissions standards. That means those markets will continue to play a major role in shaping the global automotive industry, likely leaving the US auto industry in the dust.

Sign of the Future?

A greater understanding of the implications of the rollback on the automotive industry and its Tier 1 and Tier 2 suppliers will not be known until the E.P.A. releases more information.

But one thing is clear: the cause and effect of the rollback is potentially big. As population density increases in US cities and traffic congestion rises in relation, improving inner city air quality will become an even more critical issue.

About the Expert: Mike Rayne is a Managing Director at FTI Consulting and is based in Atlanta. He is a member of the Performance Improvement practice. Mr. Rayne has 35 years of experience in the automotive industry in global executive leadership positions with Tier 1 companies, including Delphi Automotive and TRW. He has led performance improvement engagements with both on and off highway companies.